ACCG 923 Business Research report PDF

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Accounting standards and Practice Business research report on Woolworths Ltd ...

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3/10/2019

Business Research Report Company: Woolworths Group Limited

ID: 44055846 ACCG 923 Accounting standards and Practice

Table of Contents

Executive summary

Woolworths Group ltd is one of the largest retail supermarket chain with 995 stores across Australia. The main purpose of this business research report is to demonstrate to the members of the accounting department and audit committee of Woolworths Group Ltd on how it applies professional judgment to measure the items of PPE (refer to appendix 1) and do they align with the requirements of AASB (refer to appendix 1) 116(Property, Plant and equipment) as well as AASB 108(Accounting Policies, changes in accounting estimates and errors) for the financial year of 2018/19. The report also briefly demonstrates that to what extent the company meets the qualitative characteristics of financial information regarding PPE according to conceptual framework (statement of financial accounting concepts no 2). This report will give an indication to the audit and accounting committee on any discrepancies if arising and why. By observing this report, the company managers or directors can take precautionary steps in preparing annual report and give a true and fair view of financial information to external users.

The company does justifies all the accounting policies of PPE according to the requirements of AASB 116 and qualitative characteristics of financial information except detailed information is missing on residual value used, depreciation rates and revaluation model. Some detailed disclosure for this aspects needs to be made. However, the company has shown a very decent amount of information on their annual report and which can be useful to financial investors. However, more significance should be given to faithful representation and verifiability of financial information. Without proper detailed information of the residual value, depreciation rates and revaluation model, the information cannot be faithfully represented and verified according to the qualitative characteristics of financial information. More detailed analysis should be conducted about the three aspects lacking which will improve financial report’s usefulness to external users.

Body of the Report

Introduction Professional Judgment (refer to appendix 1) is used by the accountants to select the right accounting policies on the financial statements. This report is distinctly about the measurement and evaluation of PPE items of Woolworths Group Ltd according to the requirements of AASB 116 for the financial year of 2018/19. First, we will evaluate whether the items are being measured according to the requirements of AASB 116 and AASB 108 using professional judgment. Secondly, we will evaluate the findings with one of its main competitor, Coles Group Ltd. Finally, we will evaluate on whether the disclosures made harmonize the qualitative characteristics of financial Information of Conceptual framework.

Question- 1(measurement of PPE items according to AASB 116) The main components of AASB 116 includes initial recognition (initial and subsequent costs), Depreciation, the revaluation model and De recognition (disposal of assets).

Initial recognition AASB 116 recommends that the items of PPE should be measured at cost initially. All costs (initial costs such as purchase price, direct materials, fixed costs, subsequent costs) should be capitalized that will bring the asset to the location intended to be used. Woolworths Group measures the carrying value at Cost less any accumulated depreciation/ amortization and impairment losses.

Depreciation

AASB 116 recommends that the depreciable amount of PPE includes the capitalized (initial and subsequent) costs that should be allocated systematically over its estimated useful life. Common methods are the straight line method (Cost-residual value/Useful Life) and Reducing balance method. The useful life should be reviewed each year and any changes should be accounted for over the remaining useful life. Woolworths Group uses a straight line method of depreciation. Each item of PPE are accounted separately with different useful lives (25-40 years for building and Leasehold properties, 2.5-10 years for plant and equipment). However, detailed information is lacking on the application of residual value and depreciation rates.

Revaluation model According to AASB 116, the revaluation model incorporates Assets measured at fair value at date of revaluation less any subsequent accumulated depreciation/impairment. If any item of a class of assets of PPE is revalued, the entire class is revalued. Any gain on revaluation (unrealized gain) is recognized in equity as revaluation reserve. Woolworths Group did not disclose enough relevant information about how gain or loss is determined nor which assets are being revalued specifically. However, it disclosed impairment loss on plant and equipment and revaluation gain on land, buildings and other properties for year 2018/19.

De recognition (disposal of assets)

AASB 116 recommends that Property, Plant and Equipment should be derecognized as soon as it is realized that it will not generate any future economic benefits or when it is sold. Any gain or loss is recognized in the profit and loss account. Woolworths Group recognizes any gross proceeds from disposal of asset at the same date as the contract is signed or title passes from the purchaser. Any net gain or loss is recognized in the consolidated statement of profit and loss.

Woolworths Group mostly satisfies the requirements of AASB 116 for measuring PPE except detailed information lacking in revaluation model, residual value and depreciation rates.

Question 2 (Competitor analysis- Coles Group Ltd)

Initial recognitionBoth companies follows the same policy of recognizing assets at cost initially which includes purchase price directly attributable, subsequent costs and classifies assets according to their separate useful lives. Woolworths has a net carrying amount of $9519 million for the year ended 2018/19 compared to $4119.2 million of Coles which means Woolworths has more resources diverted in the PPE sector.

Depreciation

Both companies uses the straight line method (Cost less residual value/useful life) for depreciating PPE, same range of useful lives(20-40 years for buildings and leasehold properties, 2.5-20 years for plant and equipment) for similar assets. Coles charged much less depreciation of 3825.9 million compared to Woolworths of 7464 million for the financial year of 2018/19. Coles Group has a wider useful life and disposes the assets more spontaneously compared to Woolworths. This is enabling less depreciation and more net carrying value of assets. However, both companies lacked in information about residual values used, depreciation rates.

Revaluation Model

Both companies did not disclose enough information about how profit and loss is determined from changes in fair value nor which class of assets are being revalued. However, Woolworths recorded a net impairment loss of $129 million and Coles of $42 million for the financial year of 2018/19. It shows that Woolworths’s recoverable amount

of assets( Property, plant, land) were much less as well as using the assets for long period of time compared to Coles. Coles perhaps is disposing the assets when the recoverable amount is not much less than the carrying value resulting in less impairment loss.

DE recognition (Disposal of Assets)

Woolworths Group derecognizes an asset as soon as it is disposed of or contract is being signed with the purchaser for sale. However, Coles Group Ltd derecognizes the assets when it can be immediately sold in its present condition and when only the carrying value can be recovered which does not align with the requirements of AASB 116. Both companies showed a net loss (Woolworths-$27m and Coles- $4.7) on this segment for the financial year of 2018/19. This shows Coles Group Ltd derecognizes their assets as soon as the recoverable amount is the same or not much less than the carrying value resulting in less net loss.

Coles Group Ltd is performing better regarding in financial terms regarding depreciation, revaluation model and disposal of assets compared to Woolworths Group Ltd.

Question 3

The disclosure requirements for PPE are very well articulated in Paragraph 73(a)-(e) of AASB 116. These requirements are-Measurement methods used to determine the carrying value of non-current assets, Depreciation methods, rates and residual value, Accumulated Depreciation and any alteration of carrying amount( at beginning and end of period). According to the annual report of 2019, Woolworths Group Ltd measures the net carrying value of PPE at cost less accumulated depreciation, amortization expenses and impairment losses. Depreciation is charged using the straight line method over estimated useful life (see appendix 2 for more information).The total cost of PPE for 2018/19 was $16983 million less accumulated depreciation/amortization of $7464 million to give net carrying amount of $9519 million at the end of period. The beginning carrying amount was $9026 million. The net movement during the year is $493 million which consisted of $2040 million additions, $36 million acquisitions, $38 million disposals, $233 million transfers to assets held for sale, $129 million impairment loss and other relevant factors, However, detailed information about change in depreciation rates, residual values used and disposal of PPE items are not provided. Overall, Woolworths primarily fulfills the requirements of AASB 116.

According to IASB QC 1- QC 39, the qualitative characteristics of financial information according to Conceptual Framework can be categorized into two parts1. Faithful Representation and Relevance( Fundamental) 2. Comparability, timeliness, verifiability and understandability( Enhancing)

Relevant financial information has the capacity to amend any course of actions taken by the external users. The cost of PPE, depreciation charged, acquisitions, and net carrying amount is clearly shown to give a viable idea about business operations. This information are all relevant to external users. Information should be complete, unbiased and free from error which is faithful representation. Detailed information about the revaluation model, residual value used and depreciation rates is lacking. For this reason, the financial information do not fully meet faithful representation.

Comparability allows the entities to compare its accounting policies within the entities and the same industry. The figures on the financial statements can be easily compared with competitors and analyzed.

Verifiability assures that the information is represented neutral and free from bias. The annual report gives some brief insights, but verifiability cannot be assured fully without the source of internal information. Timeliness inherit the features of providing useful financial information on timely basis. The report is timely as published every year. Understandability inherit the features of providing financial information to the users those who possess some knowledge on business, accounting, finance and economic fields. The cash flow and accounting policies regarding PPE are very clearly stated enabling users to understand the financial information vividly.

Conclusion

Overall, Woolworths Group Ltd demonstrated their PPE items according to AASB 116 except lacking information on residual values, depreciation rates and revaluation. However, they are not performing well on financial terms compared to Coles Group Ltd regarding depreciation, revaluation model and DE recognition of assets. Woolworths Group Ltd.’s disclosure of PPE lacked in the qualitative characteristics of verifiability and faithful representation. This can be misleading for the investors in regarding decision making for allocation of capital. However, Woolworths has shown a decent amount information compared to Coles Group in their annual report. It is recommended that they provide more details to make the financial statements more useful to the external users.

References 1. Woolworths group (2019). 2019 Annual Report, Available at: https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf [viewed 1 Oct. 2019]. 2. Coles group (2019). 2019 Annual Report, Available at: https://www.colesgroup.com.au/FormBuilder/_Resource/_module/ir5sKeTxxEOn dzdh00hWJw/file/Coles_Annual_Report_2019.pdf [viewed 1 Oct. 2019]. 3. ACCA global (2019). Accounting for property, plant and equipment | ACCA Global, Available at: https://www.accaglobal.com/an/en/student/exam-supportresources/fundamentals-exams-study-resources/f7/technical-articles/ppe.html [viewed 1 Oct. 2019]. 4. AASB 116 (2016). Property, Plant and Equipment, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_0704_COMPjun16_01-17.pdf [viewed1 Oct. 2019]. 5. AASB 108. (2015). Accounting Policies, Changes in Accounting Estimates and Errors, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-15.pdf [viewed 1 Oct. 2019]. 6. Leo, K., Knapp, J., McGowan, S. and Sweeting, J. (2019). Custom Publication for Macquarie University ACCG923 & ACCG926. 1st ed. Melbourne: Wiley Direct, pp.271-333. 7. IFRS. (2019). Conceptual Framework for Financial Reporting, Available at: https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/ [viewed 1 Oct. 2019]. 8. IAS plus. (2019). Conceptual Framework for Financial Reporting 2018, Available at: https://www.iasplus.com/en/standards/other/framework [viewed 1 Oct. 2019]. 9. IFRS Conceptual Framework Project Summary. (2019). Conceptual Framework for Financial Reporting. [online] Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-

summary-and-feedback-statement/conceptual-framework-project-summary.pdf [Accessed 1 Oct. 2019]. 10. Pkf Accounting summary 2017-07. (2017). IAS 16 Property, plant and equipment. Available at: https://www.pkf.com/media/10033170/ias-16-property-plant-andequipment-summary.pdf [viewed 1 Oct. 2019].

Colesgroup.com.au, 2019) (Woolworthsgroup.com.au, 2019) (Accaglobal.com, 2019) (AASB 108, 2019) (IFRS Conceptual Framework Project Summary, 2019) (IFRS, 2019) (IAS plus, 2019) (Pkf Accounting summary 2017-07, 2017) (Leo et al., 2019) Aasb.gov.au, 2019)

Appendices Appendix 1 Key terms-



Professional Judgment- Professional accountants first identifies the particular issue, then collect and analyze all the relevant information related to. Then, taking all the applicable accounting and ethical standards based on particular circumstances, they come up with possible solutions. Then, they apply professional judgment considering the flexibility of regulatory environment and conclude to a single solution. This is professional judgment.

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AASB – Australian Accounting Standards Board

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PPE- Property, Plant and Equipment

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Subsequent costs- costs that are incurred for asset after the cost of that particular asset is bought to the location intended for use and shown on the financial statements

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Financial statements- written records kept to demonstrate the financial position and performance of an entity

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External users- includes people who are not related to a business entity but uses the entity’s general purpose financial reports regarding decision making about providing capital. Includes bankers, current and potential investors, suppliers, government agencies, tax authorities.

Appendix 2 Financial statements of Woolworths Group Ltd for the year ended 30 June 2019 Property, Plant and Equipment Section of Woolworths Ltd for the year ended 30 June 2019

Property, Plant and Equipment Section of Woolworths Ltd for the year ended 30 June 2018

Significant Accounting Policies and estimates

Consolidated statement of Profit and Loss of Woolworths Group Ltd for the year ended 30 June 2019

Consolidated statement of other comprehensive income of Woolworths Group Ltd for the year ended 30 June 2019

Consolidated statement of financial position of Woolworths Group Ltd for the year ended 30 June 2019

Consolidated statement of changes in equity

Consolidated statement of cash flows

Appendix 3 Property, Plant and equipment section of Coles Group Ltd for year ended 30 June 2019...